Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

I would like to know why anyone in the USA would oppose such a thing, given that North Korea is doing what Paul Krugman in The Return of Depression Economics claimed creates a "free lunch": printing money. Why would it be OK for the Federal Reserve System to do what Krugman recommends -- directly purchasing short-term U.S. Treasury paper in order to fund U.S. Government spending -- but wrong if North Korea essentially does the same thing?

It seems to me that Krugman should be writing a blog post or column praising North Korea for its "stimulus" efforts.

Monday, February 27, 2012

In his latest column, Paul Krugman believes that he has the answer to saving the European economy from disaster. The solution? In a word, inflation. Yes, if the European Central Bank will show the "courage" to print more money, everything will be fine.

I admit that at one level, Krugman is correct when he writes:

So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.

More specifically, the creation of the euro fostered a false sense of security among private investors, unleashing huge, unsustainable flows of capital into nations all around Europe’s periphery. As a consequence of these inflows, costs and prices rose, manufacturing became uncompetitive, and nations that had roughly balanced trade in 1999 began running large trade deficits instead. Then the music stopped.

Note that Krugman does not think that countries like Greece have been irresponsible, or at least he indicates such in this column. Instead, he seems to believe that another round of inflation would pretty much solve everything.

Krugman is correct when he says that the single currency of the euro did impose some requirements, although like a typical Keynesian, he believes that any fiscal discipline really is a bad thing, given that all wealth creation begins with government spending. When Europe went to the euro, it meant that when governments like that of Greece borrowed from European banks, they would have to generate the revenues via taxation to pay back the loans.

Obviously, that would restrict the Greek government's behavior, given that it could not print euros, and borrowing would have to be done at a sustainable rate. Unfortunately, given the fact that Greece, like many other small European countries, has a bloated public sector that is controlled by militant labor unions, it was inevitable that the Greeks sooner or later would borrow well beyond any threshold to pay back the loans, given that fiscal discipline does not exist with the Greek government.

Unfortunately, Krugman believes that fiscal discipline is bad, bad, bad, and that inflation is a much better "solution" to any problem that the Law of Opportunity Cost might pose when governments spend themselves into a corner. (Don't forget that in his book, The Return of Depression Economics, Krugman declares that literally printing money creates a "free lunch" -- his words.) He writes:

If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.

That might be true, although Krugman forgets that if Greece still were on the drachma, then the banks might have been more reluctant to lend to that government -- although the prospect of being backstopped by the European Central Bank might have been enough to encourage the banks to lend even when they figured being paid back in euros was a stretch. Even so, if the loans had been in euros and Greece were on the drachma, then Greece still would have had the same issues, given that the banks would not have been willing to accept drachmas in repayment.

By being on the euro and with the liberal lending policies by banks, the Greeks were getting a free ride, and they knew it and believed that they were entitled to it. This is something Krugman never addresses because (1) the inevitable outcome would fall into the Opportunity Cost category, and all good Keynesians know that printing money trumps laws of economics, and (2) government spending CREATES wealth and the more government spends, the better off we are.

Likewise, when Krugman has called for the U.S. Government to borrow money and then give it to state governments, he claims that such actions would "stimulate" the economy and foster economic recovery. When California's government employee unions take an ever-growing bite of the Golden State's revenues and overall economy, Krugman refuses to see this situation as the unions plundering everyone else. Instead, he seems to believe that the unions are the responsible actors, and anyone who thinks otherwise is evil.

Keynesian theory literally turns economics on its head. Spending and printing money create wealth; wealth creation through saving, capital formation, and judicious choices by consumers and investors creates depressions and should be stopped by government, which should use force, if necessary, to keep people from acting responsibly.

Friday, February 24, 2012

Paul Krugman seems to be in a bi-partisan spirit in his latest column, claiming that Mitt Romney is a "closet Keynesian," and he may be right. I'm not sure that Romney is a closet anything other than a guy who wants to be president, and he has the "presidential looks" that come from Central Casting.

I must admit that Romney's economic leanings don't interest me much and I doubt the guy has any real compass other than one in which the needle points to the White House. So, while Krugman tries to convince readers that Romney is another Keynesian, I have decided to comment on other examples of economic illiteracy that have been appearing on the NYT editorial page.

We have a couple of interesting ones. First, there is a claim that the GM and Chrysler bailouts somehow saved the economy as though it is possible to both dig a hole deeper and simultaneously claim one actually is filling it up. (The piece is by Steve Rattner, an Obama auto adviser, which means we are seeing political spin at its worst.)

Let me first look at the bailout. At the time the Obama administration essentially nationalized GM (and partially-nationalized Chrysler), these companies had balance sheets that were billions of dollars out of whack and were hopelessly in the red. Had Obama not been beholden to the United Auto Workers and forced taxpayers to prop up these firms, both would have gone into Chapter 7 bankruptcy, which means all of the assets of these companies would have been liquidated to pay their creditors.

Rattner is correct that the bailouts did keep other companies tied to GM and Chrysler afloat, but like everyone else who writes for the NYT editorial page, his claim that the bailouts were economically-successful depends entirely upon eliminating the opportunity costs involved. He does that by pointing ONLY to one side of the equation and ignoring the other. It is like saying that if my wife hands me $10 from her purse, the economy is $10 wealthier.

Unfortunately, many people believe that governments create wealth by fiat, which is akin to a doctrine of State Economic Creationism, and Rattner is one of them. I don't blame Obama and his minions for their spin, as politicians are famous for that, but nonetheless economics does not permit us to look ONLY at one side and not the other.

The truth about GM and Chrysler is that there were (and still are) consuming more resources than they produce. That's right, the government could not eliminate that sad fact simply through executive order, no matter what Rattner and Obama might claim. As for the assets of GM and Chrysler, they would not have disappeared; the useful ones would have been sold to other auto companies and the industry could have better restructured.

True, the UAW would have taken a hit, but the only way to defend the bailouts from the UAW perspective is to claim that higher factor prices create more wealth. (That is a favorite tactic of Paul Krugman, by the way, which literally turns economics, opportunity cost, and the history of economic growth on their heads.) In truth, the UAW workers were overpaid relative to the auto industry, yet they were less productive than their counterparts.

For all its claims that it wishes to "protect" consumers, the Obama administration has an odd way of doing so. Consumers had spoken loudly in the case of GM and Chrysler, yet Obama slapped them in the face. However, neither the NYT nor Paul Krugman believe that, in the end, consumers should have any say when it comes to politically-protected firms and politically-protected unions.

(In his Playboy interview, Krugman also repeats the same fallacies that high wages by themselves create wealth. This is another rendition of the wrongheaded belief that governments can order wages to rise, which then creates wealth instead of what really happens: governments destroy wealth.)

As for Ridge and Peters, I have one question: If methanol is such a great idea, and if all it takes is a $100 tweaking to ensure that all cars can be flexible in fuel choices, then why haven't entrepreneurs taken that leap? One can go on about "network costs" and the like, but entrepreneurs created gasoline and diesel networks during the 20th Century without government leading the way.

Instead of trying to understand why fuels like methanol are not widely distributed, Ridge and Peters succumb to the wonkishness of central economic planning, as though Washington can guide an entire industry by fiat. Because I am not familiar with much of the regulatory structure in the auto industry, I don't know how the government's current set of rules would affect the building and marketing of cars powered by natural gas or methanol.

For example, do the CAFE mileage standards play a role? What about other rules? I don't know, but more often than not, we find that government regulations often stand in the way of good ideas.

Nonetheless, I don't get that sense with Ridge and Peters. Instead, they see something and create the false notion that government successfully can order something into production without there being terrible economic dislocations.

Wednesday, February 22, 2012

I feature a wonderful 2009 piece by Robert Higgs (I had a link to it last year) that I think really shows the differences between the Austrians and what Higgs calls the "Vulgar Keynesians," including Paul Krugman.

Higgs lays out six areas where the Keynesians especially are weak, including:

Aggregation: Keynesians believe that they can explain an entire economy through aggregate demand, aggregate supply, price levels, and the rate of interest;

Relative prices: The only thing that means anything regarding prices to Keynesians is the overall "price level. Higgs writes: "If relative prices change, which of course they always do to some extent, even in the most stable periods, these changes are "averaged out" and affect the calculated change, if any, in the aggregate price level only in a shrouded and analytically irrelevant manner."

The rate of interest: Higgs points out that the rate of interest "is a crucial relative price — namely, the price of goods available now relative to goods available in the future." Keynesians, on the other hand, believe it is just a "price of money," so the lower the price, the better;

Capital and its structure: In the short run, notes Higgs, Keynesians view capital as being homogeneous, with its only real value being the money spent in creating it. Furthermore, Keynesians see capital stock as a "given" and cannot conceive of malinvested capital, believing that capital that is not in use only is "idle," and can be revived with enough spending;

Malinvestments and money pumping: Because Keynesians don't believe that massive malinvestments have anything to do with an economic downturn, their "solution" of pumping more money into the economy cannot have any other result except success -- provided government pumps enough money. Higgs writes that Keynesians also seem to have an abiding faith in the healing powers of inflation;

Regime uncertainty: What Krugman calls the "Confidence Fairy," Higgs notes that the political atmosphere does make a difference regarding investment and especially long-term capital investment. He writes: "The vulgar Keynesian does not understand that policy activism itself works against economic prosperity by creating what I call "regime uncertainty," a pervasive uncertainty about the very nature of the impending economic order, especially about how the government will treat private property rights in the future. This kind of uncertainty especially discourages investors from putting money into long-term projects."

While I am sure that Higgs' points will enrage the Keynesians, nonetheless it is clear that Higgs is writing about economics, not statistical aggregates. There really is a difference.

Monday, February 20, 2012

[Update]: Don Boudreaux today has commentary about Krugman's insistence that Herbert Hoover was an "austerity" president. (Remember that it was Hoover in his memoirs where Andrew Mellon's "liquidate" quote was found, and that Hoover writes that he rejected Mellon's advice.)

Writes Boudreaux:

Describing "austerity policies" as "the insistence that governments should slash spending even in the face of high unemployment" in the hope that such spending cuts will restore business confidence, Paul Krugman remarks: "If this sounds to you like something Herbert Hoover might have said, you're right: It does and he did" ("Pain Without Gain," Feb. 20).

Easily accessed evidence prove Mr. Krugman wrong.

Here, for example, is economist Steven Horwitz: "the real size of government spending in 1933 was almost double that of 1929. The budget deficits of 1931 and 1932 represented 52.5 percent and 43.3 percent of total federal expenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large." Also contrary to Mr. Krugman's claim, Hoover proudly trumpeted his administration's high-spending and interventionist policies. On the campaign trail in 1932 Hoover bragged that "We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic."**

The Keynesian view of the economy is pretty simple. Factors of production are homogeneous, production and consumption are not related except to say that the purpose of consumption is to clear the shelves so that producers can make new goods to put on the shelves. The sole purpose of a "job" is to put income in the hands of workers so that they can spend and in order to make way for new production. In other words, it is a model-driven, mechanistic view of economics in which human action is not purposeful, but rather robotic.

In dealing with the situation with the European countries such as Greece, Spain, Ireland, and Portugal, he rightly condemns the policies that the European Central Bank has imposed, but for all of the wrong reasons. You see, Krugman really believes that if the ECB simply slashed its interest rates and loaned near-infinite amounts of money to these countries, that they soon would spend themselves into prosperity and that somehow there would be so much economic activity and new tax revenues that the extra loans would pay for themselves.

Austerity, according to Krugman, is bad but not because it imposes unjust tax and regulatory burdens upon people in order to pay the debt service for loans that profligate governments took out in order to spend beyond their means. No, austerity is bad because it cuts government spending.

Furthermore, the real reason that these countries are forced into austerity measures is because the banks that made these foolish loans (with the promise of being backstopped by central banks) are now calling the policy shots. Yet, we now see the ridiculous scenario of banks lending money to these governments so they can pay their debt service for previous loans although everyone knows that these countries cannot generate enough economic activity to pay back these loans in full.

In other words, we are looking at default. Now, the USA, which Krugman holds as a model of how to properly deal with the recession (or at least has not engaged in European-style "austerity"), is defaulting through inflation. I believe that it would be much better for Greece and the other European states that are facing these crises to default on their loans, and reduce their payments or suspend them altogether.

Unfortunately, Krugman prefers the game of "Let's Pretend We're Rich." He urges Congress to borrow even money to give to states for their own spending, with the idea that we can worry about the unpayable debt tomorrow, a Scarlett O'Hara approach.

Even Krugman knows that this cycle of debt cannot continue forever, but he seems consumed with the belief that sooner or later the perpetual motion machine that is the economy will gain "traction" and move on its own, paying down the debt as it goes. That is nonsense, but unfortunately it is nonsense that is being passed off as sophisticated economic thinking.

Friday, February 17, 2012

One of my criticisms of Paul Krugman is that he really has abandoned economics while claiming that he is analyzing things from an economic point of view, and he does it again in his latest NYT column. First, he engages in crude stereotypes (which is typical of the NYT writers in general), and second, he then uses what one learns on the first day in graduate microeconomics: one cannot legitimately use interpersonal utility comparisons.

A prominent economist told me once that he worked with Krugman at a previous employer before, he added, that Krugman "went insane," and at one time the man did real economic analysis. Unfortunately, once he found that he could make a lot more money being a political operative, Krugman abandoned the fundamentals of economics such as the Law of Scarcity and the Law of Opportunity Cost and decided to push the view that governments via the printing press can do magic things and create wealth from green paper.

Many readers of The Times were, therefore, surprised to learn, from an excellent article published last weekend, that the regions of America most hooked on Mr. Santorum’s narcotic — the regions in which government programs account for the largest share of personal income — are precisely the regions electing those severe conservatives. Wasn’t Red America supposed to be the land of traditional values, where people don’t eat Thai food and don’t rely on handouts?

The article made its case with maps showing the distribution of dependency, but you get the same story from a more formal comparison. Aaron Carroll of Indiana University tells us that in 2010, residents of the 10 states Gallup ranks as “most conservative” received 21.2 percent of their income in government transfers, while the number for the 10 most liberal states was only 17.1 percent.

Thus, this hardly is news for libertarians even if Krugman wants us to believe that he has made a new discovery. Unfortunately, in trying to explain it, he engages in the kind of stereotyping that he would condemn in other people.

(Having gone to high school with two prominent NYT people, I can tell you that if they are typical of what inhabits the Times building, these are people who operate on the most superficial of levels, depending upon templates for opinions all the while looking down on the Great Unwashed around them. Yes, that is a stereotype, but the NYT editorial page is full of such snobbishness.)

First, Krugman blames those evil Christians:

...there is Thomas Frank’s thesis in his book “What’s the Matter With Kansas?”: working-class Americans are induced to vote against their own interests by the G.O.P.’s exploitation of social issues. And it’s true that, for example, Americans who regularly attend church are much more likely to vote Republican, at any given level of income, than those who don’t.

Of course, I had no idea that Democrats ever avoided "social issues" in their politics. Being that I am employed at a university where nearly all faculty members are liberal Democrats, I find it a bit ironic that people who are obsessed with all aspects of politicizing and codifying the Sexual Revolution would accuse others of having a fetish with "social issues."

Then it gets even more interesting:

Still, as Columbia University’s Andrew Gelman points out, the really striking red-blue voting divide is among the affluent: High-income residents of red states are overwhelmingly Republican; high-income residents of blue states only mildly more Republican than their poorer neighbors. Like Mr. Frank, Mr. Gelman invokes social issues, but in the opposite direction. Affluent voters in the Northeast tend to be social liberals who would benefit from tax cuts but are repelled by things like the G.O.P.’s war on contraception.

Krugman, you see, believes that income levels just happen and offers no insight at all as to the difference between the wealth of places like Texas and the blue-blood wealth of the Northeast. To him, income apparently is just income.

When I was doing research for a paper that I later had published in Public Choice, I studied different income and ethnic groups in all of the congressional districts in the USA. (I spent about eight hours a day for a month hand-loading data into a spreadsheet, which was time-consuming but ultimately enlightening about the voting patterns of people in these groups.)

I found that a lot of people in the wealthy suburbs of cities like Dallas and Houston voted Republican, while people in the wealthy suburbs of northeastern cities tended to support Democrats. However, it was not the income levels that were intriguing, but rather the fact that this was the classic confrontation of "old money" versus "new money." The northeastern wealth tends to consist of the "old money" of bygone eras, and the "trust fund" babies, while as wealthy as the business executives in Dallas, vote heavily Democratic.

Having gone to school with "trust fund" babies, I can see the difference quite clearly between the two groups. The "trust fund" liberals were much more likely to drink heavily and have an aversion to work altogether. They also tended to look down on people from the middle class, regarding them as suckers and idiots.

The "new money" wealthy in the southern states, however, tend to be people who had begun life either being poor or middle class and who earned their wealth through their jobs. They were more likely to go to church (and when they did, they were more likely to be Baptists than Episcopalians), and they were much more likely to have come out of a public school setting than were the "trust fund" blue bloods, who went to exclusive private schools.

The other high-income people likely to vote Democratic are secular Jews, and many of them have been dominant in industries like the mass media or on Wall Street. They are likely to be strong supporters of abortion rights and gay rights, and it is understandable why they would find a home with the Democrats.

"Old money" Democrats also are the ones who are more likely to fill the ranks of environmentalists and other groups that wish to use the state to remake society in their own image. As William Tucker once wrote, these are people who have a wonderful vision for others, but don't plan to be part of the Brave New World they are creating for those people they consider to be their inferiors.

Interestingly, a lot of entrepreneurs on the West Coast are more liberal in their social values, and are likely to support Democrats. Google is a prime example, as the vast majority of its political contributions go to Democrats. From what I can see, they support Democrats not so much because they believe in the Welfare State, but rather because they tend to be much more comfortable with the Sexual Revolution than most conservative Republicans.

As for interpersonal utility comparisons, Krugman gives us this gem:

Modern Republicans are very, very conservative; you might even (if you were Mitt Romney) say, severely conservative. Political scientists who use Congressional votes to measure such things find that the current G.O.P. majority is the most conservative since 1879, which is as far back as their estimates go.

How anyone can compare political attitudes today with those of more than a century ago, or to say that people are more "conservative" than they were in 1879 just makes no sense at all. People in 1879 would not have put up with the police state that exists today and certainly would not support how governments today confiscate much greater percentages of wealth than they did back then.

For example, New Yorkers for years resisted having police issued firearms because they feared police would act like an "occupying army," yet today we see conservatives tending to support the police state. (For that matter, Krugman also supports police state measures in his unwavering support of the TSA and other entities, along with his belief that governments should be free to know everything about our personal finances.)

As I see things, it is impossible to compare voters today with voters of yesterday, as today's "conservatives" would support governmental actions that even hardline statists of 1879 would have rejected. Krugman is comparing apples and oranges at best and giving political babble at worst.

Now to agree on something with Krugman. He writes:

The message I take from all this is that pundits who describe America as a fundamentally conservative country are wrong. Yes, voters sent some severe conservatives to Washington. But those voters would be both shocked and angry if such politicians actually imposed their small-government agenda.

That is correct as far as it goes, but Krugman also forgets that Ron Paul, who is the only candidate with a true "small-government agenda," also is most feared by the Republican hierarchy. Contra Krugman, most Republicans hardly fit into a "small-government agenda" category.

Monday, February 13, 2012

Once upon a time, the editors of the New York Times used to editorialize against the establishment of the minimum wage, as they appealed to the arguments centering around the Law of Opportunity Cost. However, soon after Paul Krugman joined the NYT team as a columnist, the paper reversed its stance and decided to champion government-set price floors on wages.

Gov. Andrew Cuomo supports an increase, as does Mayor Michael Bloomberg. Only Republican state senators are resisting, using the same stale argument that a minimum wage increase is bad for business. The Senate Republican leader, Dean Skelos, argues that the measure “could be a job killer rather than a job promoter.” That contention has been proved wrong time and again.

There is plenty of evidence showing than an increase can actually help the economy, because people with lower incomes spend a larger share of their paycheck immediately on clothes, food and other goods and services. That money often goes right back into the local economy.

I guess that the editors of the NYT think so highly of themselves that they don't have to adhere to the rules of logic; the use of logical fallacies is perfectly acceptable when the fallacies are employed to promote something the editors (and Paul Krugman) support. So, let us take a look at what is being said.

The first is the fallacy of Appeal to Authority. Hey, Mayor Bloomberg and Gov. Cuomo support this, so it has to be good! Now, unless these two men are omniscient and never wrong about anything, it is irrelevant to whether or not they support the measure, and since neither makes minimum wage, neither person has to worry about being priced out of the market.

The second argument -- that Republicans oppose it, so it must be bad -- is another version of the Appeal to Authority. Democrats support it (conversely), so it must be good. Again, this is fallacious reasoning, although I realize that the NYT editors believe that they are incapable of such foolishness. (Yes, this is an ad hominem, and I mean every word of it.)

Republicans, according to the NYT, are using a "stale argument that a minimum wage increase is bad for business." Actually, not. They are saying that raising the minimum wage will jack up the price of unskilled labor, and that at the margin, some workers will lose their jobs. This is not a "bad for business" argument, but rather a "bad for some workers" statement. Nonetheless, why is this argument "stale"? Is mentioning the First and Second Laws of Thermodynamics "stale," or referring to the Law of Gravity? Of course not, but then why is the Law of Opportunity Cost a "stale" argument? Because the NYT says it is.

It gets even better. In the next paragraph, the editors commit the Fallacy of Composition when they declare that raising the minimum wage will raise the income of workers, who then will spend it and make all of us better off. Sorry, but it does not work that way, for the NYT editors (like Paul Krugman) are mistaking a marginal increase in pay for some workers (who don't lose their jobs) as a total increase in pay for all workers currently making minimum wage.

In other words, government by fiat can raise the total real income of all workers just by ordering it to be so. If that is the case -- and one can draw only that conclusion from the editorial -- then why stop at $8.50 an hour? Why not $85 an hour or even $850? If government can make small increases in total income by fiat, then why not large increases?

Now, if the editors wish to say that an increase to $8.50 would not cause economic harm but that an increase to $85 would, what would be the source of their explanation? If the Law of Opportunity Cost is off the table -- and that generally is the case on the NYT editorial page -- then what would substitute?

But what is an editorial from the NYT without piling on more economic fallacies? In the last paragraph we read:

Mr. (Sheldon) Silver (NY Speaker of the House) said he also plans to expand tax reductions for married couples earning less than $30,000 a year as another way to give incomes a boost. But he is starting with a minimum wage increase because, as he puts it, “People who work full time should not be poor.” That makes good sense for working families and their communities.

What is the definition of poor? Furthermore, is Silver saying that work causes poverty? Would a lot of these people be better off not working at all?

One would like to see all occupations being productive enough to where anyone who worked could live comfortably off that pay, but that never has been the case in all of human history, and I doubt seriously that the State of New York by fiat can change economic history, at least for the better. Again, we see the fantasy world that exists at the NYT. It really is the perfect home for Paul Krugman.

Monday, February 6, 2012

I know, I know, Keynesians never are wrong. Only government spending can give us prosperity, and that certainly is what the greatest of the Keynesians were saying as the end of World War II approached.

When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market. We shall have to face a difficult reconversion period during which current goods cannot be produced and layoffs may be great. Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable–were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.

Thursday, February 2, 2012

In a recent blog post, Paul Krugman claims that the lack of spending by state and local government is undermining our "weak recovery." Of course, he understands that the decline in state and local government spending is coming about because the economies of those states are not generating the same amount of tax revenue as they did before the depression hit.

Now, while Krugman has not called for states and local governments to raise taxes per se, he sees the Sugar Daddy role being filled by the federal government, which should incur even more debt and borrow into near-oblivion, apparently. He writes:

That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

What an utter disaster.

The comments raise two questions in my mind. The first is the issue of idle resources versus malinvestments. To the Keynesian, all it takes to employ all "idle" or unemployed resources is more spending and, if needed, outright bailouts. (Bailouts always are good if they divert resources to politically-powerful labor unions.)

To Krugman and other Keynesians, the cause of the downturn is simple: spending slowed down and government must take up the slack or we will go down the economic drain. Austrians see things differently, believing that government policies, both monetary and fiscal, directed resources toward unsustainable ends, namely housing. Furthermore, Austrians believe that by continuing to direct massive amounts of spending toward unsustainable projects like "green energy," the government and the Obama administration simply and surely are blocking the recovery.

The second issue is that of what Krugman calls "investments." All of this reminds me of Bill Clinton's throwaway campaign line, "We're going to invest in education and the environment," thus creating a new term for what government always has done: spend. All of the rhetoric and all of the spending in the world will not make government schools more effective, as study after study has demonstrated that per pupil spending does not equate to good education results, as there are so many other factors that contribute to educational success.

As for government "investment" in "green energy" products, we are seeing Obama-funded firms go belly-up as though they were on a failure assembly line. Furthermore, even with all sorts of "green" mandates, this business still sucks in resources and spits out unemployment.

No, the California high-speed rail project that Obama and Brown want is yet another example of "investment" by government that really is nothing more than a vast welfare scheme for the politically-connected -- with everyone else being saddled with the bill. Furthermore, Krugman assumes that political issues don't factor into "government investment," as though politicians cared only about financial success. As I see it, the vast amount of "government investment" is pure spending. (Yes, yes, we have roads, but roads are a tiny, tiny portion of overall government spending. And Keynesians assume that if government funds something, then it never ever could exist outside of government funding.)

In the end, Krugman is left to claim that that when state and local spending fall, that means that resources actually are disappearing, as the only way to make things appear is via government spending. In reality, the government spending, the bailouts, and the vast increase in the burden of government has assured us that this depression will last a long, long time, and Krugman will continue to call for even more destruction all the while claiming he just wants us to have a recovery.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).